White paper – Distributed Ledger Technologies (DLT) and blockchain
Technological risks and recommendations in the financial sector
Distributed Ledger Technology (DLT) is a technology that has been used for many years. Its potential has been emphasised in 2008, through the development of the blockchain (which is a particular type of DLT) on which the crypto-currency commonly referred to as Bitcoin still relies.
Nowadays, the DLT is seen, by some, as the next step towards the digital transformation and may have a significant impact on the financial sector in the decade to come. Over the past few years, the CSSF has been increasingly solicited by financial and non-financial institutions, incumbents and start-ups, wishing to present a large diversity of applications and use-cases of DLT, in various sectors.
The CSSF applies a principle of technology neutrality and acknowledges that innovative processes and technologies can contribute to the improvement of the provision of financial services. When properly used, a DLT, like other technologies, can provide benefits for the financial sector. At the same time, the DLT entails specific risks that must be understood, mitigated and monitored.
In this context, the CSSF has decided to publish a non-binding document in the form of a “white paper” aimed at guiding interested professionals in the conduct of their due diligence process related to the DLT and its use in the provision of services in the Luxembourg financial sector.
It shall be noted that the present white paper does not purport to provide all the technical explanations on the functioning of a DLT (extensive literature is already available) but to ensure that both risks and advantages are adequately and appropriately taken into consideration by the financial sector. To that extent, the document first recalls the key common characteristics and different types of DLTs and then presents the main actors and roles identified in a DLT project along with use-case examples. Finally, the main part emphasises some of the main risks related to the DLT, both in terms of governance and technical risks, by proposing key questions and recommendations for professionals to consider when performing their risk analysis and due diligence processes.